Week In Review

Fed officials continue to describe the current low inflationary environment as transitory. They may be right in the long run, yet at present inflation is not only below their target, but is trending lower.

Oil

In its monthly report for August, the IEA reduced its estimates of crude production required from OPEC in 2017 and 2018. This reduction is a result of higher global inventories than what the IEA had previously estimated, and lower estimates of developing market demand. These changing estimates result in a forecasted inventory build through 2018.

Our Take

OPEC and Russia are finding it very difficult to reduce excess inventories and to accomplish their desired inventory drawdown would require much larger output reductions. Over the longer run, new sources of supply and stagnant demand from developed economies are likely to cap crude prices at levels below those that major oil exporters would like to see. Several large oil exporting nations will need to adjust their fiscal plans in order to reflect a lower contribution to revenues from oil sales.

North Korea

President Trump and the Kim regime traded escalating threats of military action following the approval of new sanctions against North Korea and more North Korean missile tests. Japan and Australia have affirmed their alliance to the U.S., and China has called for calm and a de-escalation of rhetoric. Markets made a small risk-off move as these events unfolded.

Our Take

Capital markets are mostly discounting the likelihood of military conflict. If either the U.S. or North Korea do initiate military action, there is likely to be a strong risk-off movement in the capital markets. Such an outcome has globally catastrophic tail risks, and at the very least, a military conflict on the Korean peninsula would result in enormous damage to South Korea, a significant global economy.

Municipals

Moody’s Investors Service upgraded Wisconsin’s General Obligation rating from Aa2 to Aa1. Moody’s cited the state’s level of pension funding, liquidity, and a growing economy as reasons for the upgrade. The last Moody’s upgrade for the state occurred in 1973. After the news of the upgrade, Republican Governor Scott Walker touted the state’s “fiscal stability driven by bold reforms.”

Our Take

Even without a 2018-2019 budget in place, Moody’s upgraded Wisconsin’s General Obligation rating. Wisconsin has taken strides to improve its fiscal health including having a fully funded state pension at a time where other states have struggled with underfunded pensions.